| The riskiness of banking firms has become an important issue given the recent rise in bank failures. Several trends in the banking environment have contributed to the growing concerns regarding bank riskiness. These trends include aggressive non-bank competitors, volatile interest rates, increased costs associated with limitations on geographic and product diversification, and acceleration of both the benefits and risks associated with current developments in technology/information services. Moreover, the exposure of banks to the dramatic growth in off-balance sheet activities represents a major concern to bank regulators, uninsured depositors, and stockholders. Hence, this study examines a variety of on- and off-balance sheet factors which contribute to bank risk. The results suggest that (a) for large bank holding companies (BHC'S) interest rate swaps and loan securitization reduce interest rate risk; (b) loan commitments consistently increase market and interest rate risk for both small and large BHCs; (c) loan portfolio diversification reduces risk for all size categories of BHCs; (d) capital markets tend to penalize small BHC's if credit quality deteriorates; (e) the managerial expense preference behavior may indicate poor management and operational inefficiencies and (f) the "too big to fail" doctrine reduces both unsystematic and total risk for only small BHC's. |
